Evaluating Spotify (SPOT) Stock At New High

Shares of Spotify SPOT surged again on Thursday to hit yet another brand new high. With that said, let's take a look at what has investors so excited and see if the music streaming giant's stock might be worth buying at the moment.

Recent News

Instinet analyst Mark Kelley initiated coverage of Spotify on Wednesday, slapping a "Buy" rating and a $210 price target on SPOT. This marked a roughly 15% upside to Wednesday's closing price. Directly before Instinet gave Spotify its inaugural rating, Oppenheimer analyst Jason Helfstein initiated coverage with a "Perform" rating. "We question whether scale begets market leadership in music streaming, as it does in many other internet-enabled industries," Helfstein wrote in a note to clients.

The Oppenheimer analyst contested that Spotify's ability to drive engagement using its machine-learning algorithms are "overestimated, and will diminish over time." More importantly, Helfstein shared his concern that Spotify won't be able to improve its gross margins much, even if it is able to renegotiate better deals with the record labels the Swedish company is beholden to at the moment. And therein lies the big question for investors and Spotify.

Fundamentals

Spotify has tried to work directly with up-and-coming artists in a more record label-type capacity in a move similar to Netflix NFLX producing its own original movie and TV content. This drew backlash from the likes of Universal, Sony, and Warner.

The record labels do need Spotify because the company helped revitalize the paid music industry and it is currently far and away the most dominant player in the streaming music world, currently boasting 170 million monthly active users. However, the question is which side is more dependent on the other.

The company last reported 99 million ad-supported users along with 75 million paid customers, with premium customers making up over 90% of its Q1 revenues. Furthermore, the company's premium users climbed 45% from the year-ago period, outpacing the free version's growth of 21%-Spotify premium costs $9.99 a month.

Spotify crushes Pandora P and its 5.63 million premium subscribers, but three of the biggest and most powerful companies in the world are breathing down Spotify's neck.

Reports surfaced late last week that said Apple AAPL Music has roughly 21.5 million subscribers in the U.S., which came in just behind Spotify's 22.5 million. Last year Apple boasted just 13 million U.S. subscribers compared to Spotify's 17 million.

Apple's premium streaming music services last reported only 38 million total subscribers-though it noted the service has 50 million users including people on a free trial. Yet, the same report suggested that Apple is expected to match Spotify's U.S. subscriber base by next month, which is pretty insane considering that Apple Music launched in June 2015, while Daniel Ek founded Spotify in Stockholm all the way back in 2006.

Apple Music comes at almost the exact same price point as Spotify, but Apple simply has more money to spend, considering it pulled in quarterly revenues of $61.1 billion, compared to Spotify's $1.37 billion. Meanwhile, Amazon's AMZN Music Unlimited and Google's GOOGL new YouTube Music both compete directly against Spotify.

Performance & Outlook

Shares of SPOT have surged roughly 9% over the last month, before Thursday's climb, which crushes the S&P 500's stagnation. Investors will also see that Spotify stock has performed rather well over the last three months.

To help diversify its business, Spotify recently appointed Dawn Ostroff as its new Chief Content Officer. With a background in TV and video content, she is expected to help the company diversify its video offerings, which are relatively slim at this point. On top of that, Spotify can only hope to keep adding more and more users in order to negotiate lower royalty fees.

Spotify is projected to see its full-year revenues reach $6.17 billion based on our current Zacks Consensus Estimates, which would mark a roughly 33.5% surge. Yet, like many other young tech companies, Spotify looks set to remain unprofitable, with a full-year adjusted loss of $2.42 per share projected.

Bottom Line

The company has experienced mixed earnings estimate revision activity recently, earning two negative revisions for the full-year and two positive revisions for the following fiscal year, all within the last 60 days. This has helped contribute to Spotify's Zacks Rank #3 (Hold).

The company does currently sport "B" grades for both Growth and Momentum in our Style Scores system, but its stock price sits right near its all-time high. Therefore, it seems like Spotify stock might be worth keeping an eye on in order to evaluate its margins and see if its tech giant competitors steal some of its market share.

The Hottest Tech Mega-Trend of All

Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.

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